Trading results might be difficult to predict. Sometimes, your analyses might be wrong. If the technical data indicated a bearish trend and you went short because of this, this doesn’t mean the situation won’t change. If the value unexpectedly goes up when you are in a short position, the short squeeze happens. If you answer the question “how does a short squeeze work”, you’ll be able to benefit from this sudden fluctuation.
Under what circumstances, you can predict the short squeeze? How can one use it to gain profits? Does it last long? These are the main questions we are going to answer in this guide.
Explaining the circumstances
A short squeeze is an event that often happens in the stock market. The first aspect that might cause a sudden growth of the share value is the positive performance of the company. What’s important is that this performance should beat all the expectations. These aren’t frequent occasions but, indeed, they might follow big geopolitical events and unexpectedly positive revenue reports.
One more reason that might lead to this is a sudden deal between a small unsuccessful company and a big international corporation. Why do investors consider stocks of small companies, which are bought by bigger ones, more attractive? This is prosaic – they expect that successful management will change the newly bought public organization and that this will cause stock value growth. Thus, after such agreements are announced, traders might start actively buying an asset causing a short squeeze.
Although this event is more common in the stock market, the prices of other assets might suffer sudden upwards movements as well, making people willing to buy. In foreign exchange, a short squeeze can be caused by announcements of financial institutions that issue currencies. That is why it is so important to follow the news.
There is no single pattern for all short squeezes occurring in the markets. It heavily depends on the product and the actions of traders. The liquidity of the trading instrument is also an important factor that must be taken into account.
In general, an average short squeeze doesn’t last longer than several days. This term is enough for the majority of traders to evaluate the performance of a security and take further steps. As a rule, after an event is over, the cost doesn’t surge but, instead, starts bearish fluctuations. The major reason is that any short squeeze indicates that the product can be volatile in the future. This is not the feature that attracts traders. That’s why they start selling.
A good trader can earn from literally everything that occurs in financial markets. A short squeeze is not an exception. Although it’s not as easy to use a short squeeze to gain earnings, it’s possible and might be quite beneficial. We cannot provide you with a list of ultimate tips that will help you create a well-defined strategy for making money from a short squeeze. This event indicates extreme volatility, so no one can guarantee you that you will make money even if follow the steps below:
1) Identify shorted securities
Take a closer look at the market and try to find specific assets that are shorted. Find the most shorted securities, this will help to make more. Also, you need to know the reason why the majority of traders go short on this security.
2) Consider the catalysts
At this stage, you must know that this event occurs under specific circumstances – it always has a trigger. Find out whether there are catalysts that can trigger a short squeeze for your asset. These occasions often happen after better-than-expected revenue reports.
If you found such events that may work as catalysts for your asset price surge, take some time to study them and compare the expected results with the previous performance or the results of the biggest competitors.
3) Don’t be too hesitant
When your research is over, you should see whether the detected triggers can lead to something serious. If your study shows that a short squeeze is very likely to happen, don’t be too hesitant. This risk might be worth it for you, so don’t be afraid of it if the potential loss won’t be too considerable for your budget.
4) Track the Squeeze
Track the squeeze and you will increase your potential gains. Short squeezes might be followed by other important triggers as well.
That’s it for now. We hope that this guide will learn you how to identify short squeezes and use them to your advantage. Anyway, keep in mind that not all trading risks are rewarded. Manage your finances wisely and don’t fall for too big risks. Good luck!